Balanced forces, remaining uncertainty | Insight Investment

I'm Adrian Grey, the CIO. I'll just quickly, briefly frame some of our thinking, before my colleagues develop that in their presentations. And some takeaways from their presentations as well. I believe those presentations will be available in soft copy if you need it going forward.

So apart from introducing the agenda, which has a reasonably familiar look, I'll say a little bit about the year, just gone 30 seconds on inside as a business. But you can see really what we're talking about here is effectively the landscape which we're known for, which is managing rates, fixed income, solutions, currency, multi-asset, and some of the things which are pertinent to those areas. So, the agenda will be, it's probably best to let the agenda just play through and then you can see how we're thinking.

So just briefly, last year or Insight as a strong, stable business, strong, stable parents. Increasingly globalized business, with presence in pretty much all the main time zones. Diversified now, away from what was our core UK DB marketplace, but in a way which is absolutely not been turning our back on that core market, but really thinking about how that market's evolving, what its needs are gonna be and how we can evolve our own proposition to map onto that. Obviously the comment down the bottom there on run on is personal in that context, notwithstanding that a much more diversified business than perhaps you would've looked at 10 years ago. Big growth in areas such as, say, sovereign and individual wealth, for example.

So that's all I'll say about insight as a business, which broadly speaking can be summarized as BAU. Investment performance last year was generally pretty good with the one, probably difference in the sense that, our liability driven investment, the discretionary approach there probably the first time in a decade was slightly emphasized, slightly below its relevant benchmarks as opposed to above. So that optically brings the total down to about two thirds or so, as opposed to, frankly, not far from a hundred percent. So an increasing focus or a continued focus on making sure that we are delivering for clients effectively. And I would say that both those last two sort of LDI and currency have both had a particularly good start to the new year. So, hopefully that's gonna be all go well for the rest of this year.

Look, this year, in many ways a continuation of last year and there's an awful lot of noise. How you cut through that noise and how you distill and sift through the wheat from the shaf is part of the game effectively. Now one of the interesting points that you can take from this, I mean we can talk about that slide for the next two hours, but, is the fact that markets have increasingly been inclined to just look through it, the spike in volatility around liberation day. And you can see since then, whether it's equities or rates, volatility is generally been trending down. So markets are shrugging their shoulders.

So why is that? And effectively, I guess what they've been doing is, I'm sorry, this is the corollary of that, which is that, look, if you are in developed market equities and particularly measure market equities, you had really significant returns through the year. Any other sort of equities, you did fine developed market bonds, you did fine in terms of sort of mid to high single digit returns spending where you were the dollar. That's an interesting one, which Francesca will elaborate on a little bit in a minute or two.

It clearly weakened significantly around Liberation Day, broadly speaking, went sideways since then, had another leg down so far this year. There is a broader debate here around what's the purpose of the dollar? What are the alternatives to the dollar? Is it just a hedging instrument? Is there a broader sell US trade, which clearly maps onto an awful lot of other asset classes. And by implication there are question marks about the credibility of the central bank, et cetera, et cetera. So you can see how that picking around that central question can actually give you an insight into quite a few other asset classes, which my colleagues will develop.

But why is it the markets have been prepared to look through this noise for want of a better word? And the answer is, the macro backdrop has generally been boldly speaking, supportive. It's a bit, Goldilocks growth is good, but not great. This is the pmi, be it bit service or manufacturing inflation is okay, but generally speaking, and certainly when you look at the implied ones as well, tending to be going down rather than up. Bit of a question mark there clearly, but it's nothing like the experience that people had in the whole COVID period.

So what's not to like, I guess is the story from markets And our take on this is that sort of effectively underlying this rather benign environment are two quite fundamental forces. And it doesn't strike us as being a particularly stable equilibrium, but clearly there's a story about AI investment spending, the hyperscalers, the sheer scale of that spending its impact on not just investment, but also the wealth effect of that in terms of equities, implication of that on consumer spending, et cetera, et cetera. So that's been a really positive story, particularly in the US against that tariffs and uncertainty.

I mean, everyone's been waiting for that dog to bark in terms of impact. And it's hard to say what the counterfactual will be, but the impact on growth inflation so far has not been obviously unsettling.

What it has meant is that if you go away from tech investment's, pretty weak, if you look at broader employment markets, they're weak. And that clearly has a feedback loop onto what the policy makers are up to in terms of being unstable equilibrium. Well, today's wealth effect and AI investment spending, boom, well, maybe that's tomorrow's investment crunch or credit crunch rather. The sheer scale of the borrowing that these people need to do, it strikes us that it's almost certainly gonna be a case of winners and losers rather than a tide that floats all boats. So that's a question mark there.

Equally, maybe we've been through the whole tariff uncertainty piece and we're gonna exit this mid cycle slow down and things speed up a bit and maybe rates won't be cut and maybe everything will be fine. You know, you can argue these things both way and frankly they could be breaking both ways, but fundamentally what we're talking about here is not something which is on a stable footing.

The main investment takeaway from that is that we are very circumspect about deploying all our risk right now. And having a bit of dry powder is not the worst thing in the world. And focusing on relative value rather than big directional trades is probably the sensible thing to be doing as well. I'll come onto a little bit more about what that means for risk assets in a second or two, But just worth bearing in mind, this is as that end of, 2025 where we calculated that the average tariff rate will be 16.8 on the us you have to go back to the 1930s to find that sort of impact.

Now, tariffs are a tax, and the laws of economics suggests that the more you tax something, but less you get of it. So that's just a hold that thought. This is not something that's gone away and clearly everything that's happened in the last, well pick a day. But you could extrapolate that to be a bigger or a smaller problem. As is your want.

On the AI spending side, you can see that this is a contribution to us, GDP from effectively what this, where the spending shows up the last time there was an investment boom, like this was in the lead up to the.com bubble.

So the first point is that it clearly went on for a number of years. So this is not sort of a one year and done story. This is a multi-year investment story, but let's just bear in mind that that particular historic example didn't end particularly well. And again, it ended in a winners and losers rather than a tide. The floats all boats story.

What does that mean for policy? That's pretty Desynchronized frankly. You look at central banks, you look across to Japan and they're clearly on a totally different trajectory than they would be, for example, in the US Europe, somewhere in the middle. I know Harvey's got a slide where he'll show some of the things that are priced into some of the other markets around the G 10. And there's the one thing that strikes you is that this is not a everyone down or everyone up environment. This is a very desynchronized world, not the worst to be honest, for developed market bonds in the sense that as far as, you know, you could tell from this effectively, your rates in the Anglo-Saxon world come down a bit and they go off a bit in other places, Europe's somewhere in the middle.

But there is a corollary to this, which is when you go further out the yield curve and you get to the fiscal side of the equation and it's pretty scary stuff. So this is the us, again, this goes back to, feasibly long time series back to 1790. The US is gonna have more and more treasuries to sell more and more debt to finance. This is, these are the official CBO protections, not something we've cooked up.

So the question mark clearly then is, well, who's gonna buy all these treasuries? And again, that's a thought process that we need to make sure we're on top of. But it's hard to escape the conclusion that the risk premium between the front end of the yield curve and the back end of the yield curve, there's gonna be more rather than less. And yield curves will be steeper rather than flatter in the us Slightly different story in other places in Japan, arguably that's, that risk premium's already been priced in and maybe you should be going the other way and the UK is probably somewhere in the middle. I'll leave my colleagues to extrapolate on that.

When you get into risk assets, and these again are quite long time series, particularly on the equity side, you can see that if you look at just valuations, they are high. Japan is the standout as being in the middle of the as the only market, frankly, which is in any way in some sort of, in the historic norms. Everywhere else is in the top decile and traveling. So there's a certain amount of, trust me, this will keep going, in all this.

Those, I think it goes back to the mid nineties on the left hand side. So there's, it's a reasonable range of history we're talking about here. And again, when you look at spreads, not all in yields, which I know is a clear distinction to be made, but, be it in the investment grades or the high yield space in credit, we're well into the top quartile of observed tightness of spreads in some cases further.

So it's a bit like the joke of, you know, if you want to get to b you probably don't wanna start at a, it's not an obvious landscape to navigate because effectively whereas the macro landscape is reasonably reassuring, it's fully priced and it's pretty fully priced as particularly in in risk assets.

Another way of saying that is, look, the animal spirits are up and running. And we measure this in terms of our risk appetite indicator. And, you know, it's well up into the, again, this goes back a fair distance, we're only showing it for the last five years or so, but we're well up into the top quartile here. So there's an element of circumspection and reality we think is required in all this, and that'll be apparent in some of the comments my colleagues make.

And then if you go back and look at fixed income as a whole, which is front and center of what we do, and it's quite instructive that different bits of fixed income form quite differently in different environments. And you can see here this is a rather sort of, confusing slide. I'm sorry about this, but just if you look at the last 2025, for example, the difference between a performance between the EM sovereign space where it was almost into the mid-teens and right down the bottom was global A BS, which is typically floating rate in nature, was the year before global A BS was right at the top.

So the corollary for that is in a world where if you're gonna be focusing on relative value, then don't just focus on, for example, individual stock selection, focus on different segments of the markets as well because frankly, there is an awful lot of potential, things to be done there.

So that's broadly speaking, a little sort of teaser I guess. So as some of the thinking which we're gonna talk about today, this sort of overall top down landscape's more will Peter and Shahir, we will drill into a bit the next bit, Francesca Harvey and Adam will talk a little bit more about, so what are the actual views we're happy to put into portfolios when it comes to some of the things I've been mentioning.